Is Easing of COVID-19 Restrictions Accelerating International Trade – 3 Stocks to Consider

I. Sector Landscape and Outlook

As per Stats.NZ, overseas visitors arriving in NZ grew by 177,000 YoY, and NZ-resident traveller arrivals increased by 143,000 YoY in March 2022, as governments globally, including NZ, have started to relax restrictions, enabling interested travellers to cross their borders. Monthly, overseas visitors arriving in NZ grew by 24,000 MoM, and NZ-resident traveller arrivals increased by 27,700 MoM in March 2022. Further, the government is building the i-SITE network to upgrade sites, boost online services, and increase engagement with local history, culture and heritage attractions. For each dollar invested in i-SITE, the network returns would be $8.70 in GDP.

Import and Export Momentum Continues for All Top Destinations

As per Stats.NZ, the export to Japan grew by 58% to $437 million, primarily driven by a rise in aluminium and aluminium articles, followed by the USA, which grew by 26% to $680 million, mainly due to an increase in lamb, and EU growth was 26% to $511 million. Meanwhile, imports from the USA grew by 29% to $603 million, led by rises in pharmaceutical products and mechanical machinery and equipment. This was followed by imports from China by 8.9% to $1.2 billion, driven by the increase in electrical machinery and equipment, vehicles, parts, and accessories, followed by EU growth by 18% to $867 million, led by rises in pharmaceutical products and vehicles, parts, and accessories.

Exhibit 1: Trend in Merchandise Trade Values ($ million) in April 2022

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

NZ Traded $12.0 Billion of Goods in April 2022

As per Stats.NZ, goods exports increased by 17% to $6.3 billion, and goods imports grew by 15% to $5.7 billion, resulting in a monthly trade surplus of $584 million in April 2022 versus April 2021. Export was primarily driven by Milk powder, butter, and cheese products, which grew by 30% to $1.6 billion, followed by Meat and edible offal, which grew by 16% to $877 million. Meanwhile, the import was driven by pharmaceutical products, which grew 92% to $241 million, followed by Mechanical machinery and equipment, which grew by 15% to $823 million.

Exhibit 2: Milk Powder, Butter, and Cheese Contributed the Most Towards Export in April 2022

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Rise in International Visitors in March 2022

As per Auckland International Airport Limited, international passengers (excl. transits) grew 330.1% YoY, and transit passengers grew 157% YoY in March 2022, primarily due to the removal of isolation requirements for arriving New Zealander's permanent residents. The international passengers grew 172% from the previous month. Meanwhile, the passenger demand on short-haul international routes for March 2022 bounced to 15.1% of pre-COVID March 2019 levels, and airline load factors grew towards historical levels.

As per the COVID-19 Protection Framework’s latest update, released on 11 May 2022, NZ is reopening its border to all tourists and visa holders from 31 July 2022. Vaccinated travellers under the Accredited Employer Work Visa category could apply for an NZ visit from 4 July 2022.

Index Performance:

The S&P/NZX All Industrials (Sector) Index generated a 2-year return of ~31.76% versus ~1.72% by the S&P/NZX 50 Index. Therefore, NZX All Industrials Index overperformed NZX50 Index by ~30.04% in 2-year.

Exhibit 3: S&P/NZX All Industrials (Sector) vs S&P/NZX50 Index

Source: REFINITIV

Key Risks and Challenges:

The trade restrictions imposed by the NZ government to control the infection spread are impacting the tourism and trade industry. A disrupted supply chain challenges the transit of essential goods from origin to destination and affects the quality and cost, which results in inflationary pressure. Also, the country is experiencing the impacts of climate change (like more frequent severe storm events, flooding, and coastal inundation), thereby restricting normal business flow.

Exhibit 4. Key Risks in Industrials Sector:

Source: Analysis by Kalkine Group

Outlook:

As per the Fortnightly Economic Update released by The Treasury on 29 April 2022, the continued increase in commodity prices led to a narrowing trade deficit for NZ. Export prices increased significantly, mainly dairy and meat prices that reached record highs, up around one-third on an annual basis. Due to this, NZ’s goods export values rose 17% YoY, despite reduced export quantities. Meanwhile, the global growth outlook weakens further because of the Ukraine crisis and the rise of Omicron in China. The economic activity recovered in December 2021 Quarter from a substantial proportion of the September quarter's losses that are likely to continue into 2022.

Apart from the sector-specific factors, we have also analysed four NZX-listed companies operating in the same sector. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1. Auckland International Airport Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$10.68 billion)

Business Description:

Auckland International Airport (NZX: AIA) is New Zealand’s primary and busiest airport operator.

Outlook

The company anticipates an underlying loss after tax of $25-$50 million for FY22. Further, it has reconfirmed its capital expenditure guidance between $250-$300 million for FY22, considering the current trading environment.

On 16 May 2022, the company released March 2022 monthly traffic update and April 2022 preview, where it stated that total passenger volumes fell by 14.8% YoY in March 2022. However, international passengers (excl. transits) grew 330.1% YoY, and transit passengers grew 157% in March 2022.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low-double-digit (in % terms). A slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering its strong balance sheet, healthy liquidity, and decent outlook.

Considering the facts above and the recent update, we give a “Buy” recommendation on the stock at the closing market price of $7.255 per share, down 1.29% as of 26 May 2022.

2. Port of Tauranga Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$4.22 billion, Gross Dividend Yield: 3.136%)

Business Description:

Port of Tauranga Limited (NZX: POT) is New Zealand’s largest port and international freight gateway. The location of the port is central to key export commodity sources.

Outlook

The company applied for resource consent to grow its capacity by increasing its container berths to the south of the existing wharves. Further, the outlook for H2FY22 is under pressure, led by uncertainties around the supply chain disruption, and the full effects of the Omicron outbreak are yet to be seen. Considering the performance of H1FY22, FY22 earnings are anticipated to be between $103-$110 million (versus $102.4 million in the 2021 financial year).

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering POT’s diversity of cargoes and decent outlook.

Considering the facts above and the recent update, we give a “Buy” recommendation on the stock at the closing market price of $6.2 per share as of 26 May 2022.

3. Air New Zealand Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$2.19 billion)

Business Description:

Air New Zealand Limited (NZX: AIR) focuses on connecting the New Zealanders to each other and NZ to the world.

Outlook

The company anticipates subdued financial results for FY22 due to disruptions caused by COVID-19 related circumstances. As of 23 February 2022, the company had liquidity of $1.4 billion, comprising cash of ~$170 million, $240 million of Crown Facility and $1.0 billion of redeemable shares to support the operations.

On 26 May 2022, the company announced the successful completion of its inaugural Australian Medium-Term Notes issuance, securing debt funding of A$550 million or ~NZ$600 million. Australia and New Zealand Banking Group Limited, Citigroup Global Markets Australia Pty Limited, Commonwealth Bank of Australia and MUFG Securities Asia Limited were joint lead managers on the transaction.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The stock has been valued using EV/Sales based relative valuation (on an illustrative basis), and the target price reflects a rise of low double-digit (in % terms). A premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering easing restrictions for international passengers and other travel restrictions.

Considering the facts above and a decent outlook, we give a “Buy” recommendation on the stock at the closing market price of $0.65 per share, up 0.78% as of 26 May 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.